How to Spot Bad People

The honest man becomes committed to the crook before he knows there is anything wrong.

Last week I used this quote from J.K. Galbraith, the storied Harvard economist, during a joint presentation that Lisa Dane and I made on Martha’s Vineyard. Lisa is a Senior Managing Director in the Global Risk and Investigations Practice of FTI Consulting. We were speaking at a conference hosted by the Family Office Association, discussing what villains do to earn your trust and highlighting the importance of due diligence to wealth management.

In this post, I describe three behaviors of financial predators that we profiled and leave you with my favorite technique for spotting bad guys. Hint: One especially helpful service costs about $12, but the payoff can be worth hundreds of thousands of times your cash outlay, maybe more, depending on what you find. (I have no ties to the company that provides this service.)

Crooks Seek Third-party Validation from Decent People

Back to Galbraith. In his quote, he does not mean that honest people become knowing participants in frauds. Nor do I. Rather, crooks routinely trade on their affiliations with decent people to establish cover for scams.

Crooks often hang (figuratively) with celebrities or people whose titles create immediate legitimacy. During the presentation on Martha’s Vineyard, I cited a Ponzi artist whose profile photo on Facebook includes a big-name actor from Pulp Fiction. I also described how a friend avoided a Ponzi scheme in which a US Ambassador provided industry expertise – but was not a knowing participant in the scam.

Crooks Get out in front of Problems

Lisa told our audience what might be my new favorite story. She described the case of a client looking to acquire a stake in a Canadian firm. The seller advised, said unequivocally, “If you Google me, you may see a reference to a financial issue in the U.S., but I’m not the guy whose name comes up.”

Apparently, the 175,000 results that Google returned in .54 seconds were sordid. Upon further investigation, Lisa’s firm discovered that he was, in fact, “the guy whose name comes up.”

What does this story mean to investors?

Hearsay doesn’t work. Villains google too. Which means the burden of due diligence is on you to fact check all claims when you are considering illiquid securities or private equity investments.

Crooks Prey on the Entitled

In December of 2015, while researching material for my book, I wrote letters to a who’s who of financial crimes. The felons included Bernie Madoff, Allen Stanford, and Nevin Shapiro. Among other questions, I asked, “How do you identify your targets?”

Barry Minkow, who once took a Ponzi scheme public, wrote back: “The perpetrator will make the target feel special, like the ‘average’ doesn’t apply to them because they are better than average and are therefore entitled to a ‘special, higher rate of return.’ ”

My take on his observation is that avoiding crooks is as much about understanding our personal vulnerabilities as it is about identifying the behaviors of bad guys.

Fake Credentials: A Leading Indicator of Future Bad Behavior

In 2014, the WSJ did a report on Steven Wessel. He hosted the NYC dinner for the annual Oxford-Cambridge Boat Race Dinner, attended by the who’s who of these universities including the last governor of Hong Kong. Wessel claimed he had earned a graduate from Oxford, and by all accounts the evening was a ripping success.

Problem. Wessel never earned a graduate degree from Oxford, which is what he claimed. At the time, he was knee deep in the middle of several frauds. Today, you can find his whereabouts on the public website hosted by the bureau of prisons, which is less important than simply knowing that fraudsters lie about their academic degrees. Wessel is only one example of this pattern of behavior.

The good news is that there are resources for spotting fake credentials. DegreeVerify is the one I hinted at earlier. For about $12 (prices vary), you can confirm academic degrees from most US universities and some overseas. Full disclosure: The service does not provide information from Oxford. It would have been necessary to pick up the phone and call overseas had you been evaluating Wessel.

Here’s another tip. Check the alphabet soup of financial credentials that wealth managers use. Organizations like the CFA Institute enable you to confirm that an adviser is entitled to use his or her “CFA” designation. And if an organization does not offer online confirmation, you can usually find someone who will help you over the phone.

Next Steps

I’m always searching for due diligence techniques that investors can use when evaluating wealth management advice. If you have one you like, tell me about it. I’ll send a copy of my novella Mr. President to the first person who comments below about a value-added due-diligence resource not mentioned anywhere in this post. (BrokerCheck and IAPD: Sorry, I have written about these resources in the past.)

After our presentation to the Family Office Association, for example, one member of the audience told me a doozy of a story about how he uses Glassdoor when evaluating money managers or financial advisers. But I suppose insights about using this website for wealth-management due diligence rather than job searches are a story that needs to wait for another day.

Norb Vonnegut

The New York Times describes my novels as “money porn,” “a red-hot franchise,” and “glittery thrillers about fiscal malfeasance.” Through fiction I explore the dark side of money and the motivations of those who have it, want more, and will steamroll anybody who gets in their way.